The question that precedes this question and gives context to it is:

(16.9) Consider a situation where an insurance firm wants to incentivize its policyholder to exert effort in prevention of risky behaviors. Suppose that when a policyholder exerts high effort ( e_H = 10 ), she has a probability of 0.1 of experiencing an adverse event (e.g., an accident), which costs the insurance firm $10,000. A policyholder who exerts low effort ( e_L = 0 ) has a probability of 0.2 of the same event happening. The utility function for a policyholder is de^2, where d represents the size of any policy discounts the insurance company offers her (assume that her reservation utility is equal to u (U bar) = 0 ). If the effort level of policyholders is observable by the insurance firm, identify the type of contract that the insurance firm should offer to induce the policyholder to exert high effort level.

Question 5 1 pts (16.10). Now suppose the effort level of the policy holder is no longer observable to the insurance firm. Identify the type of contract that the firm should offer the policy holder to induce her to exert a high effort level. Define d_a as the policy discount that the insurance company offers to the policy holder when she suffers an accident, and d_na as the policy discount after she does not suffer an accident Od_a=$0, d_na - $1000 od_a=$1000, d_na - $1000 Od_a=$35, d_na = $100 O d_a=$0, d_na = $35 Question 5 1 pts (16.10). Now suppose the effort level of the policy holder is no longer observable to the insurance firm. Identify the type of contract that the firm should offer the policy holder to induce her to exert a high effort level. Define d_a as the policy discount that the insurance company offers to the policy holder when she suffers an accident, and d_na as the policy discount after she does not suffer an accident Od_a=$0, d_na - $1000 od_a=$1000, d_na - $1000 Od_a=$35, d_na = $100 O d_a=$0, d_na = $35